Edified Equity Podcast Episode 21: A Case Study on how Entrance/Purchase Cap Shouldn’t be a Deal Killing Factor and Modeling in Upside and Value Add is Crucial!
Show Notes:
Welcome to the Edified Equity Podcast!
My Name’s Dino and Here we will focus on all of the unique Benefits associated with being a Passive Equity Investor in an Apartment Syndication.
You can learn more about us on the Web, iTunes, Stitcher, FB, YouTube, & our Award Winning Blog on Bigger Pocket. All associated links will be in the show notes.
Associated Links!
Edified Equity Website:
http://www.edifiedequity.com/
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https://itunes.apple.com/us/podcast/dino-pierce/id1381283719?mt=2
Edified Equity Podcast Stitcher:
http://www.stitcher.com/s?fid=185852&refid=stpr
Edified Equity Facebook Group:
https://www.facebook.com/groups/MultifamilyPassiveCashFlow//
Edified Equity YouTube Channel:
https://www.youtube.com/channel/UCiTMeHhVXIMgCujDzXTxkww
Bigger Pockets Blog:
https://www.biggerpockets.com/blogs/10726-benefits-multifamily-passive-investors
Edified Equity Podcast Episode 21: A Case Study on how Entrance/Purchase Cap Shouldn’t be a Deal Killing Factor and Modeling in Upside and Value Add is Crucial!
Adding Value and Improving Operations are 2 things you control and they can both dramatically Increase the value of your property in a relatively short time period!
Let’s pretend we’ve identified 172 Units in great market.
We purchased it at a 6.34% cap rate.
*NOTE: This alone will make some investors choose to leave the OM shut, never take a good look, and kill the deal.
Purchase Price = $5,500,000.00
The Market is a 7% cap rate and we’re well below that with our 6.34% market cap purchase.
However, we’re also purchasing it at Low Price Per Door, for our said, Market at $31,997/door vs. $40-$45,000.00/door - which is common in this market.
Rents are $150.00 below market. We’ve confirmed this with our, Best in Class, Property Management Company that are local to the area. We also used several market reports, and did some secret shopping to confirm this as well.
Our Property is in need of operational improvements (simple upside) as it’s currently self-managed. They haven’t raised the rent, over the years, in order to keep occupancy elevated. They didn’t want risk residents leaving as a result of increasing the rent alongside the market increases. Honestly, this is not a bad concept but they let it go too far - for too long.
Over the 1st 12 months, as leases renew, we are going to slowly increase rent by $100.00/mo. This is still, $50.00, below market; therefore, we are being conservative and are still the best rate in town.
We’re also going to reduce expenses by 10% through our operations. We know we can reduce the expenses from 60% to 50%; in speaking w/Property Management we actually think we can operate at 45% so, again, 50% is conservative. We aim to under promise and over deliver.
We’re going to say even though it’s a 7% cap market we’re increasing the cap rate we’re using to value our property by 1%, or 100bps, to stay consistent with our conservative approach in underwriting. We also allowed for more vacancy even though we’re still $50.00 below market and don’t really expect to see much of an increase. If someone does decide to leave we’ll turn the unit, add value, and get back online ASAP.
By following our conservative business plan (increasing rent and managing expenses) we increased the Net Operating Income NOI by $173,392.00 taking it from $348,800.00 to $522,192.00. If we use the conservative 8% value cap rate our property is now valued at $6,527,400.00, an increase of $1,027,400.00 since purchase 12months ago.
Current value = $6,527,400.00 - $5,500,000.00 Purchase Price = $1,027,400.00 Increase in Value
For every $1.00 we increased NOI (mostly through operational upside) the value increased by $5.93.
Increased NOI = $173,392.00 X $5.93 = $1,027,400.00 Total increase in value.
This is one example that proves,